D196

Revenue - Cash payments to suppliers

Cash payments to suppliers = (current period purchases x current period payment rate) + cash paid on previous period purchases.

CIK

Central Index Key - a unique identifying number for each company in the SEC's EDGAR system.

CPA

Certified Public Accountant. Someone who has passed the CPA exam administered by AICPA American Institute of Certified Accountants.

Vertical Analysis

Comparing companies in the same industry at the same point in time. 1. Income Statement: Divide all numbers by the biggest number - typically total revenues. 2. Balance Sheet: Divide all numbers by total assets. 3. Analysis Results: Do not provide the answer. The results tell us the next question.

Horizontal Anaylsis

Comparing percentages over time for the same company. Year 2 minus Year 1/Year 1 = percentage change from year to year. Looking for: 1. Large percentage changes. 2. Directional changes compared to sales.

Period Costs

Cost not directly related to a product, service, or asset OUTSIDE of the factory. They are charges as expenses to the income statement in the period in which they are incurred.

Fixed Budget Costs

Costs are constant each production period (e.g., each quarter)

Expenses

DECREASE - The amount of assets consumed in generating revenues. Employee salaries and utilities used. Liabilities created.

Bookkeeping

Day-to-day keeping track of things.

Do expenses and dividends increase or decrease owner's equity?

Decrease

Direct Costs

Direct (or controllable) Fixed Costs - salaries of managers who work for you - Your salary - Equipment leases/rentals - Advertising

Segment Margin Statement - First Level

Direct (or controllable) Fixed costs Indirect (or common) - salaries of managers who work for you - Your salary - Equipment leases/rentals - Advertising

Direct Materials Purchases Budget

Direct materials production budget + ending direct materials inventory - beginning direct materials inventory = the Direct Materials Purchases Budget

EPS

Earnings (loss) Per Share: Net Income divided by Outstanding Number of Shares of Stock. The EPS tells the owner of a single share of stock how much of the net income for the year belongs to him or her.

Net Income (or Net Loss)

Earnings or profit...an overall measure of a company's performance. Net Income: If revenues exceed expenses. Net Loss: If expenses exceed revenues.

What does the Financial Statement Analysis involve?

Examining both the relationships among financial statement numbers and the trends in those numbers over time. Diagnosis - identifying where a firm has problems - and prognosis - predicting how a firm will perform in the future.

Financial Accounting

External users' decision making Investors and creditors Credit analysis regulatory uses (financial health of bank and insurance companies) Estimate the value of a company. Detailed data Daily decision making

What 2 things MUST be reported in the financial statement notes?

FASB and SEC are both required to report supplementary information.

FASB

Financial Accounting Standards Board - these make the accounting rules. Non-government agency it is private group.

Income statement

For a period of time (such as a year), How much profit did we make? Reports the amount of net income earned by a company during a period.

Statement if cash flows

For a period of time (such as a year), Where did our cash come from? Where did it go? Reports the amount of cash collected and paid out by a company: operating, investing, and financing.

What is the key purpose of management accounting?

Fulfilling the competitive needs of the company.

Operating Capital

Funds available for use in financing the day-to-day activities of a business.

Manufacturing

General Motors Apple Boeing

GAAP

Generally Accepted Accounting Principles the end results of public process through hearings on proposed standards.

GASB

Governmental Accounting Standards Board sets the accounting and financial standards for state and local governments.

Owner's Equity

How much did the owners originally invest in the company (net assets) plus how much profit they have left in the business.

Income Statement

How much did you make? Last month, last quarter, last year? Revenues - Expenses = Net income.

Revenues

INCREASE - The amount of assets created from the sale of goods or services. The increase in a company's net assets as a result of what the company does. The amount of satisfied liabilities.

Accounting steps

Identify the issue, gather information, identify alternatives, and select the option that will most likely result in the desired objective.

Direct Materials

Include the cost of raw materials that are used directly in the manufacture of products.

Manufacturing Overhead

Includes all manufacturing costs incurred during the manufacturing process that are not classified as direct materials or direct labor.

The statement of stockholder's equity

Includes changes in capital stocks as well as changes in retained earnings.

Selling and Administrative Expense Budget

Includes planned expenditures for all non-production expenditures. 1. The cost of supplies used by the office staff. 2. The salaries of the sales manager and company president. 3. The depreciation of administrative office buildings.

Direct Labor

Includes the hourly wages and other payroll-related costs and expenses.

Do revenues increase or decrease owner's equity?

Increase

Indirect Costs

Indirect (or common) Fixed costs Costs normally incurred for the benefit of several segments within the organization; sometimes called common costs or joint costs. - Salary of your supervisor - Other costs of company headquarters

Non-operating expenses

Interest and income taxes

Management Accounting

Internal decision making Product costs Breakeven analysis Budgeting Performance evaluation Outsource production? Summary data Occasional decision making

IASB

International Accounting Standards Board - formed in 1973 to develop international accounting standards.

What 3 sources come from Capital

Investors, creditors (lenders), and the business itself in the form of earnings that have been retained.

Diluted EPS

Involves estimating what EPS would be if certain stock transactions had occurred.

Investors

Is the business profitable now? What is the potential for the future?

Monetary Measurement

Items that are not measurable cannot be entered into a company's accounting records.

Accounting is often called...?

Language of business

Debits

Left Side - Credit - Decrease - Negative account changes.

Cash

Left Side debit cash to show increases. Right Side credit cash to show decreases. Assets are done this way. Liabilities and Owner's Equity are the opposite. Right side credit increase and left side debit decrease.

What are the two key external users?

Lenders and investors

Balance sheet

List as of a point in time, resources (assets), obligations (liabilities). Reports assets, liabilities, and the (owner's equity). The difference between what is owned and what is owed.

Who are the internal stakeholders?

Management, suppliers and customers, and employees.

What are the two primary areas of acounting?

Managerial accounting (Internal) and financial accounting (external).

What are the three main types of businesses?

Manufacturing Service Merchandising

Book Value

Measured by the amount of owner's equity. This is usually less than the company's market value.

Liabilities

Obligations to pay cash, transfer other assets, or provide services to someone else. Amounts owed. These must be measured in dollars.

Balance Sheet Limitations

Often report costs NOT the Market Value Some economic assets are NOT reported (intangible assets)

Net Income

Operating income minus interest expense and taxes.

What are the three functions of managerial accounting?

Planning Controlling (the process of tracking actual performance) Evaluating

Capital Budgeting

Planning for the acquisition of property, plant, and equipment.

Management

Planning, daily monitoring, evaluation. Use both Managerial accounting and financial accounting info.

Short-run Planning

Production and process prioritizing Operational budgeting (profit planning)

Gains and Losses

Refer to money made or lost on activities outside the normal business of a company.

Articulation

Refers to the relationship between an operating statement (the income statement or the statement of cash flows) and comparative balance sheets, whereby an item on the operating statement helps explain the change in an item on the balance sheet from one period to the next.

Operating Income

Reports the results of what a company does on a daily basis, or its operations.

Credits

Right Side - Credit - Increase - Positive account changes.

Accounting Ethics - consequences

SEC - Legal punishments AICPA - Professional sanctions - lose your license etc. Business community - Loss of credibility

Gross Profit or Gross Margin

Sales - Cost of Goods Sold = Gross Profit (Gross Margin)

Segment Margin

Sales - Variable Costs = Contribution margin - Direct (or controllable) fixed costs = Segment Margin

Analysis of external variables is accomplished through which technique?

Sales Forecasting

SEC

Securities and Exchange Commission they make sure that investors are provided with full and fair information about publicly traded companies.

What does form 10-K provide to users?

Security Exchange Act of 1934. An annual yearly report. Required by the SEC to be filed 60 days of the end of the fiscal year. It shows others the info about a company so they can decide if they want to invest or not.

Classified Balance Sheet

Separating items into current (obligations expected to be satisfied within a year) and long-term results.

Dividends

Show distributions of net income (earnings) to owners. A transaction involving dividends paid reduces owner's equity. Earnings not retained in the business.

Product-Line Income Statement

Shows both the gross and profit and the income (loss)

Statement of retained earnings

Shows the accumulated profits or losses of a business since the business started.

The Statement of Cash Flows

Shows the cash inflows (receipts [receiving and collecting]) and the cash outflows (payments [wages, loans, suppliers, etc.) of an entity during a period of time. 1. The operating activities 2. The investing activities 3. The financing activities

Product-Line Profitability Report

Shows the profitability of different product lines over time.

Cost Center Report

Shows the sales and expenses broken down into variable and fixed expenses.

Pro Forma Financial Statement

Shows what this financial statement will look like at the end of the period of the budget is met.

Organizational Segments or Subunits

Sometimes called groups, divisions, product lines, or subsidiaries.

Long-run Planning

Strategic planning Capital budgeting

Disclosure

The accepted way to convey information to users when the information to users when the information is too uncertain to be recognized.

Retained Earnings

The amount of earnings that have been retained and reinvested in the business.

Accounts Payable

The amount the company owes to its suppliers but has not yet been paid.

What is the key component of managerial accounting?

The analysis of costs

What does the balance sheet tell you?

The company's asset mix and liability mix. Assets = Liabilities + Owner's Equity Reports the resources of a company (assets), the company's obligations (liabilities), and the difference between what is owed (assets) and what is owed (liabilities), called owner's equity.

What does the income statement tell you?

The company's profitability Reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common. Measuring the economic performance of a company. Net income is reported on the income statement.

Segment Margins

The difference between segment revenue and direct segment costs; a measure of the segment's contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

Financial Statement Analysis

The evaluation of the company's performance using the balance sheet, income statement, and the statement of cash flows

Managerial Accounting

The gathering and analysis of information for the purpose of internal decision making. Product costs, breakeven analysis, budgeting, performance evaluation, and outsource production?

Financial Accounting

The gathering, reporting, and analysis of information primarily for the benefit of external users such as investors and creditors. Credit analysis, regulatory uses (such as financial health of bank and insurance companies), estimate the value of the company. Balance sheet, income statement, and statement of cash flows.

Market Value

The price that would have to be paid to buy the same asset today.

Segement-Margin Ratios

The segment margin divided by the segment's net sales revenue, a measure of the efficiency of the segment's operating performance and, therefore, its profitability.

Debits and Credits

The terms debit (Dr.) and credit (Cr.) mean left and right, respectively. These terms do not mean increase or decrease, but instead describe where a company makes entries in the recording process. That is, when a company enters an amount on the left side of an account, it debits the account. - When it makes an entry on the right side, it credits the account. When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits.

What is the major difference between Managment and financial accounting?

The types of financial reports prepared.

Notes

These contain such information as the assumptions made in computing certain numbers. 1. Summary of significant accounting policies [Revenue recognition, inventory methods, depreciation methods, use of estimates] 2. Additional information about the summary totals found in the financial statements. [Inventory make up, receivables, pension liabilities] 3. Disclosure of important information that is not recognized in the financial statements. [Legal proceedings and other events] 4. Supplementary information required by the Financial Accounting Standards Board (FASB) or the securities and Exchange Commision (SEC) [business segment information, domestic/international sales breakdown]

Manufacturing Overhead Budget

This includes all production costs other than those for direct materials and direct labor.

Investing Activies

Those activities associated with buying and selling long-term assets.

Operating Activities

Those activities that are part of the day-to-day business of a company. Sales - Cost of Goods Sold - Operating Expenses

Financing Activities

Those activities whereby cash is obtained from or repaid to owners and creditors.

What is the purpose of the financial accounting cycle?

To capture financial information from transactions.

What is the purpose of financial accounting?

To satisfy the needs of outside investors, creditors, and regulators for fair and consistent reports of financial position and operations.

Exchange Transactions

Trading (exchanging) one thing for another.

Transaction

Two parties exchanging something of value.

Evaluation

Use summary information to evaluate the financial health and performance of the business.

Merchandising

Wal-Mart Home Depot Kroger

Accounting Equation

What MUST always balance as a result of recording a transaction in the financial accounting cycle? Assets=Liabilities+Equity

What are the first two questions potential investors and creditors ask about a business?

What are the resources of the business? What are the existing obligations?

When is form 10-K required to be filed?

What the business does Risks to which the company is exposed. Significant properties owned by the company. Significant legal proceedings involving the company. Management's discussion and analysis of the company's financial condition and results. The company's financial statements Other miscellaneous items

What does the statement of cash flow tell you?

Where cash is coming from and where cash is going Reports the amount of cash collected and paid out by a company in operating, investing, and financial activities. It is for the same period of time as the income statement.

Lenders

Will the loan be repaid? Current income, existing obligations, existing assets.

What is the focus in a manufacturing business?

Work-in-process inventory account. Direct materials (wood, etc.) Direct labor (wages) Manufacturing overhead cost (all other costs: rent, utilities, staff etc.)

Accounting

a system for providing quantitative information, primarily financial in nature, about economic decisions.

Accounting cycle Steps

1. Analyze Transactions (Business documents/economic essence) 2. Record the effects of transactions (design a code or system) 3. Summarize the effects of the transactions (journal entries) 4. Prepare reports (what do the decision makers need to know

Name the 3 different types of government expenditures.

1. Discretionary - the congress can decide how to spend this part of the budget. 2. Mandatory - these must be made, and congress has no discretion. 3. Interest on federal debt - This must always be paid.

What 3 factors need to be considered in preparing the Production Budget?

1. Projected sales volume for the period. 2. The desired amount of ending inventory. 3. The amount of inventory ready on hand in the beginning inventory. **Sales budget + ending finished goods inventory - beginning goods inventory = the Production Budget

Direct Labor Budget

1. This is used to calculate how many hours it takes to produce 1 unit. 2. How many workers you will need.

What are Business Documents used for?

1. To confirm a transaction has occurred. 2. To establish the amounts to be recorded in the books and the records of the business. 3. To facilitate the analysis of various types of business events.

Which items should be entered into a company's accounting records?

1. Transactions - sales and delivery of a product, payment of wages to employees, borrowing of money from a bank. 2. Events - increase or decrease in the value of investments in other companies.

Merchandising Business

A business that purchases finished goods for resale.

Cost Variance

A difference between the actual cost and the budgeted cost.

Budget

A dollar-based expression of a plan of action that shows how a firm, an organization, or an individual will acquire and use resources over a specified period of time.

Direct Materials Budget

A forecast of how many units need to be made. This will determine how much money we will need to pay for raw materials. **Production budget x direct materials per unit = Direct Materials Production Budget

Sales Budget

A function of both uncontrollable external variables and controllable internal variables.

Return of Investment

A measure of operating performance and efficiency in utilizing assets; computed in its simplest form by dividing net income by average total assets (also known as return on assets or ROA).

Account

A place where we record the effects of all transactions that relate to a certain item.

Segment Margin Statement

A profit and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed cost behavior patterns.

Asset

A resource that is owned or controlled by a company that will provide probably future benefits.

What is EDGAR?

A search tool on the SEC's website Electronic Data Gathering, Analysis, and Retrieval system.

Statement of Retained Earnings

A statement of the earnings that have been retained in the business. This links the income statement to the balance sheet. Beginning retained earnings + Net Income for the Period - Dividends Paid during the Period = Ending Retained Earnings.

Costs of Goods Sold Statement

A statement that sums the cost of goods sold for an accounting period based on the cost of goods sold formula.

Responsibility Accounting

A system of evaluating performance in which managers are held accountable for the costs, revenues, assets, and other elements over which they have control.

Arm's Length Transaction

A transaction in which a buyer and seller with equal bargaining power act independently to get the best possible deal.

Recognition

A way to report financial information is to include the estimates and judgments in the financial statements.

Advising

Accountants advise managers on how to structure these activities so as to achieve the goals of the business, such as generating profit, minimizing costs, providing efficient services, and so on.

Product Costs

All costs incurred INSIDE of the factory to produce the product. These costs are inventoried as part of the balance sheet.

Cost Accountant

An accountant who is specially trained to prepare and analyze accounting information for internal decision-making.

Common-Size Analysis

An accounting tool that focuses on the line items on financial statements as a percentage of a selected (or common) figure.

Masters Budget

An integrated group of detailed budgets that outline the overall operating and financing plans for a specific period, usually a year. 1. Sales Budget 2. Production Budget 3. Selling and Administration Budget

Decentralized Company

An organization in which managers at all levels have the authority to make decisions concerning the operations for which they are responsible.

Profit Center

An organizational unit in which a manager has control over and is held accountable for both cost and revenue performance.

Investment Center

An organizational unit in which a manager has control over and is held accountable for cost, revenue, and asset performance.

Responsibility Center

An organizational unit in which a manager has control over and is held accountable for its performance.

Cost Center

An organizational unit in which a manger has control over and is held accountable for cost performance.

What are the three basic functions of an accounting system?

Analysis, bookkeeping, and evaluation

Analysis

Analyzing business events to determine if information should be captured by the accounting system.

Service Business

Any organization whose main economic activity involves producing a nonphysical product that provides value to a customer.

Expanded Accounting Equation

Assets = Liabilities + Equity Assets = Liabilities + [Capital Stock + Retained Earnings] Retained Earnings = Cumulative Net Income - Cumulative Dividends. Assets = Liabilities + [Capital Stock + Cumulative Net Income - Cumulative Dividends]

Liquid Assets

Assets in the form of cash or easily converted into cash.

Illiquid Assets

Assets like undeveloped land that take time to convert to cash.

Service

Audit Firm Hospital Law Firm

What 3 financial statements are the output from the accounting system?

Balance Sheet Income Statement Statement of cash flows

Variable Budget Costs

Based on the expected sales or production volume for each production period.

Basic EPS

Based on the historical transactions and involves dividing net income by actual average shares outstanding during the period.

Who establishes the financial accounting rules?

By the Financial Accounting Standards Board (FASB) and are enforced by the Securities and Exchange Commission (SEC)

Revenue - Receipts and purchases

Cash collected from customers = (current period revenue x current period collection rate) + cash collected from previous period sales.

How do you access a company's 10-K?

www.sec.gov Click on filings. Click on search for company filing. Search